No one’s home buying process looks the same as another’s, but for most, it often leads to the same destination: A mortgage lender. Regardless of whether you’re looking for your first home or your dream home, a single-story ranch or a multi-story townhouse, the need for a mortgage lender is practically a universal one. But which mortgage lender is best for you? Understanding the different types of mortgage lenders will help ease the home buying process. Let’s break them down below.
Difference Between Mortgage Lenders and Brokers
Before getting into the different types of mortgage lenders, there’s an important distinction to make: the difference between mortgage lenders and mortgage brokers. A mortgage lender is any bank or financial institution that provides people with home loans. They establish specific guidelines for borrowing that exist to vet your financial status and make sure you can make payments and repay your loan. The interest rate, the repayment schedule, and all other terms are established by mortgage lenders and mortgage lenders alone.
Brokers, on the other hand, are simply a middle man between lenders and borrowers. They have no say in the borrowing terms, but they can help coach you on improving your finances to make sure you pass the lender’s specific guidelines. Brokers will help you look for the right lender depending on your finances, and many of them actually get paid a nice commission by either the lender or the borrower when all is said and done.
The Different Types of Mortgage Lenders
Now that the difference between lenders and brokers is understood, let’s look at all the different types of mortgage lenders. While you might think there’s just one type of mortgage lender, there are actually more than half a dozen to choose from. Let’s dive in and distinguish each from the others below. With luck, you’ll then be able to select the best lender for you.
Hard Money Lenders
While listed first, a hard money lender should probably be your last resort. Hard money lenders tend to be private companies with large amounts of cash at the ready. There’s a huge catch, though: these loans typically come with enormous down payments, incredibly high interest rates in the 10-20% range, and often need to be paid back in only a few years, sometimes more. What’s more, if you default, the hard money lender uses the home as collateral and can ultimately seize it.
Direct lenders are capable of originating their own loans (either straight from the lender’s funds or through borrowing from somewhere else). They tend to exclusively offer products they own or operate, making it worth comparing and contrasting different direct lenders before choosing one. Many direct lenders operate online or have limited branch locations, a potential drawback if you prefer face-to-face interactions.
Similar to a direct lender, a portfolio lender is capable of funding a loan with its own funds. As such, portfolio lenders are free to establish their own terms to appeal to a specific kind of borrower. This is really what sets portfolio lenders apart from direct lenders: their tendency to hone in on niche borrowers.
A warehouse lender gives short-term loans to other mortgage lenders. In other words, they’re sort of like the mortgage lender’s mortgage lender. They don’t provide money to a home buyer directly but rather give the money to the lender to give to the borrower.
Wholesale lenders provide third-party loans through institutions like brokers, banks, or credit unions. Like warehouse lenders, wholesale lenders don’t ever interact with borrowers. However, the wholesaler’s name still shows on the loan documents instead of the broker’s or bank’s. That’s because they are the true originator, funder, and sometimes even servicer of the loan.
A retail lender provides consumers — not banks or brokers — with mortgages. A retail lender can be a bank, a mortgage company, or a credit union, and they tend to offer other services beyond mortgages. These other services might include a personal loan, a checking or savings account, or even a car loan.
A correspondent lender is an institution that comes into play after your mortgage has been granted. Correspondent lenders serve as a borrower’s loan provider (and sometimes even serve as the loan servicer, too). Investors or sponsors like Fannie Mae and Freddie Mac will often buy mortgages from correspondent lenders and then resell them on the secondary mortgage market to other investors.
The lenders earn a commission when the loan is closed, then turn around and allow investors or sponsors to buy the loan. This effectively eliminates any risk on the correspondent lender’s part, putting all the risk on the investor or sponsor if the borrower fails to repay. There are times when a correspondent lender can’t sell a loan, though, and they are forced to hold onto the borrower’s loan in these instances.
The Bottom Line: Finding a Mortgage Lender
From correspondent lenders to retail lenders, hard money lenders to direct lenders, and everything in between, understanding the differences between these types of mortgage lenders can help make the home buying process run smoothly and efficiently. Of course, it’s okay if you still have questions. Thankfully, LemonBrew has answers.
LemonBrew understands that the real estate process can be complicated, but with great technological advancements, it is becoming easier than ever for buyers to secure a mortgage. We will help you find the best home loan for your unique situation when you’re ready. Or, if you already have a home, LemonBrew can help you consider a cash-out refinance to pay down your debt even faster. If you’re looking for the best mortgage lender for you, consider reaching out to LemonBrew today.